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Charity Trustees’ Conflicts of Interest

Trustees’ Legal Duties

The role of a trustee of any charity (“trustee”) is an honorary one, i.e. it is unpaid, and it is often supposed that trustees therefore have few or no legal duties. This is far from the actual position.

All trustees have numerous legal duties, as outlined in our Guidance Note on Charity Trustees’ Duties, Responsibilities, and Liabilities. For example, every trustee must not accept any personal benefit from being a trustee unless legally authorised, must act in the best interests of the charity, manage conflicts of interest, administer the charity properly, safeguard its assets, act prudently, act with care, act collectively, and ensure restrictions on funds are observed. In this post, we focus on one of those duties: the duty to manage conflicts of interest.

What is a Conflict of Interest?

A “conflict of interest” is defined by the Charity Commission in its 2014 guidance on managing trustees’ conflicts of interest as ‘any situation where the personal interests or loyalties of a trustee could, or could be seen to, prevent them from making a decision only in the best interests of the charity’ of which they are a trustee.

A conflict could arise where a trustee might gain a personal benefit in a situation, e.g. a financial benefit or pecuniary interest. It might instead arise where they have a competing loyalty to another organisation or person. A trustee has a “fiduciary” duty to their charity; this means that in law they have a relationship of trust and confidence with it which imposes a duty of loyalty. Case law emphasises that they must have “single minded loyalty” to their charity, i.e. it is exclusive, and not dilutable. An example of a conflict of loyalty would be where a trustee simultaneously holds a trustee role with another charity since that other role gives rise to the same duty to maintain “single minded loyalty”.

A conflict of interest between duties to the charity and some other interest can cover any type of duty, obligation, transaction, interest, situation, or receipt of information which creates a conflict with his duties as trustee.

Further, the trustee need not be the person directly gaining the benefit in order for them to have a conflict: if a person “connected” with the trustee may gain a benefit, this will also give rise to a conflict of interest for the trustee. Persons “connected” include family members, relatives, business partners, or businesses in which the trustee has an interest.

What is an “Interest”?

Here are some examples of categories of “interest” which (depending on the circumstances) might give rise to a conflict. These are only some examples, and something else may also be an interest although not covered below. The “person” below means either the trustee or a person connected with them:

  • • Current employment and any previous employment in which the person continues to have a financial interest.
  • • The person’s other appointments (voluntary or otherwise) e.g. trusteeships, directorships, local authority membership, tribunals. (Where, for example, they are also a trustee of another charity that is competing for the same funding, that would be a conflict.)
  • • The person’s membership of any professional bodies, special interest groups or mutual support organisations.
  • • The person’s investments in unlisted companies, partnerships and other forms of business, shareholdings exceeding the percentage set by the charity, and beneficial interests.
  • • Gifts or hospitality offered to the person by external bodies.
  • • Where the person uses, or cares for a user of, the charity’s services. (There would be a conflict in those circumstances where, for example, the trustees are discussing whether fees for service users should be increased.)
  • • Where the person has any contractual relationship with the charity.

There is no conflict of interest where a trustee also acts as a volunteer with the charity or donates money to it.

How Must Conflicts of Interest be Managed?

Trustees have a legal duty to manage conflicts of interest correctly, not a duty to avoid a conflict arising. We recommend that you familiarise yourself with the Charity Commission’s 2014 guidance on management of conflicts. It sets out a three-step approach as follows:

(1) Trustees should declare their interests.

Trustees each have an individual personal responsibility to declare conflicts of interest which affect them. Trustees should also provide a full disclosure on appointment of their interests which could potentially result in a conflict of interests so that consideration can be given to their suitability for appointment prior to their appointment. They should keep their disclosure updated at least annually and when any material changes occur. Trustees should also declare any gifts or hospitality received as a trustee that could potentially result in a conflict of interests – it is good practice for a charity to maintain a policy on the subject.

A trustee board should ensure that the charity has strong systems in place (including maintaining a register of the trustees’ interests) so that the trustees are able to identify conflicts of interest. The trustee board should have a standard agenda item for board meetings requiring trustees to declare any actual or potential conflicts of interest at the beginning of each such meeting. A trustee should declare any interest which he or she has in an item to be discussed at a board meeting, and should do so at the earliest possible opportunity, and certainly before any discussion of the item itself.

(2) Trustees should consider removing a conflict of interest.

They must consider the interest so that any potential effect on decision-making is eliminated. Where there is a serious conflict, the trustees may need to remove the conflict by not pursuing a course of action or by proceeding with the issue in a different way so that a conflict of interest does not arise or by not appointing a particular trustee or by securing a trustee resignation.

(3) Where trustees decide not to remove the conflict, they must instead prevent it from affecting their decision by following any specific requirements in the law or the charity’s governing document (i.e. its constitution) which deal with conflicts of interest and how they should be managed.

Trustees should also follow any conflicts of interest policy that the charity has adopted.  Alternatively, where there are no specific governing document or legal provisions, they must require a conflicted trustee to declare their interest at an early stage and, in most cases, withdraw from relevant meetings, discussions, decision making and votes, or they may consider updating their governing document to include provisions for dealing with conflicts of interest. They may instead, exceptionally, seek the authority of the Commission where the conflict of interest is so acute or extensive that following these options will not allow the trustees to demonstrate that they have acted in the best interests of the charity. Trustees should formally record any conflicts of interest and how they were handled, and must, if they prepare accruals accounts, disclose any trustee benefits in the charity’s accounts.

The Commission recognises that it is good practice for all charities to adopt and use a conflict of interest policy. We have included two template Conflict of Interest Policies in our Charity & Non-Profit Group for that purpose.

Consequences of Failing to Declare and Deal Properly with a Conflict of Interests

Where there is a conflict of interests which has not been properly managed, that will be a breach of the trustees’ legal responsibilities, and a trustee board decision made against that background could be contrary to the charity’s best interests or could impact negatively on its reputation, public trust or confidence in it. Such a decision could be legally invalid and/or challengeable.

The failure to manage conflicts of interest could result in a trustee having to repay the charity for any loss caused by their breach of trust, to account for any unauthorised benefit that the trustee may receive, or the reversal of a disposal of charity property where there has been a conflict of interest even though the trustee did not receive any personal benefit.

Comments on Conflict of Interest in Practice

Conflicts of interest can and do arise. It is a common issue especially in smaller charities.  The existence of a conflict in itself does not mean that anyone has acted improperly: it is how you manage it that is important.

Although the legal requirements relating to managing conflicts of interest should be understood and met by all trustees of all charities, it is all too common in practice that trustees overlook, and in some cases wilfully ignore, their duty to properly manage or avoid conflicts of interest.

Failure to deal with a conflict can easily often happen where a trustee has competing duties of loyalty between their charity and some other organisation. It is all too easy to overlook competing loyalties, and that may well be because trustees do not derive any personal (tangible or other) benefit where they have such a conflict.

Perhaps the best guiding principle that trustees should be aware of and follow is that a charity trustee can never serve two masters, and that the trustee board needs to be very wary even where in a particular situation they perceive that the conflict of loyalty that one of their number has poses a low or no risk to decision-making in the best interests of the charity.

A failure can also often happen where a trustee has a personal potential financial or measurable benefit, for example if the charity sells assets to a trustee or acquires assets from them, or pays a trustee either for their trustee role or for providing services to the charity, or employs a trustee or a relative of the trustee, or where a beneficiary of the charity is also one of its trustees.

Have you had any experience of a conflict of interest arising at your charity, and if so how did you deal with it? Have you ever contacted the Charity Commission for advice about a conflict of interest? We would like to hear about how your charity resolved a conflict of interest situation.

HMO Reforms From 1 October 2018

New rules relating to houses in multiple occupation (HMOs) apply from 1 October 2018. The key reform is the extension of mandatory licensing of HMOs. There are also new provisions regarding minimum room sizes and the management of household waste. Criminal and civil penalties can be imposed for non-compliance.

Extension of Mandatory Licensing

In simple terms, a house or flat is an HMO if it is occupied by three or more tenants who form two or more households and the tenants share some or all of the toilet, bathroom, or kitchen facilities.

Mandatory licensing applies to “large” HMOs, meaning those that are occupied by five or more people. A large HMO no longer needs to have three or more storeys to come within mandatory licensing.

Mandatory licensing will also now apply to purpose-built flats where there are up to two flats in the block and one or both are occupied by five or more people in two or more households. Each flat, if occupied as an HMO, will require a separate licence.

National Minimum Room Sizes

From 1 October 2018, HMO licences will specify which rooms in an HMO are suitable for sleeping accommodation, and by how many adults and children.

A room for a single adult or child aged 10 or over must have at least 6.51m2 of usable floor space. A room for two adults or children aged 10 or over must have at least 10.22m2 of usable floor space. A room with a usable floor area between 4.64m2 and 6.5m2 may be occupied as sleeping accommodation by a child under the age of ten.

Household Waste Management

For HMOs in England (but not in Wales), a licence granted on or after 1 October 2018 must include conditions requiring the licence holder to comply with any scheme provided by the local housing authority relating to the storage and disposal of household waste at the HMO pending collection. Schemes will vary from area to area but the idea is to require landlords to provide appropriate and sufficient refuse storage facilities for tenants.

Failure to Comply with HMO Legislation

There are serious consequences for landlords and letting agents who do not obtain licences for licensable properties, or who are in breach of licence conditions. These include unlimited fines for criminal offences, civil penalties of up to £30,000, rent repayment orders and, for persistent non-compliance, the possibility of a banning order being made against the landlord or agent. However, in relation to room sizes the local authority will allow landlords a period of time (up to 18 months) to rectify a breach.

How Do These Reforms Affect You?

Are you a landlord or tenant or local authority affected by these reforms? What steps have you had to take to prepare for 1 October? Will the new rules have the desired outcome of improving the standard of HMO accommodation? Please share your thoughts with us.

Reminder to Landlords and Agents – Section 21 Reforms Apply to All ASTs in England from 1 October 2018

On 1 October 2015 a prescribed form of Section 21 Notice was introduced for properties in England. Initially, use of the prescribed form was mandatory only for tenancies granted on or after 1 October 2015. From 1 October 2018, the prescribed form must be used to terminate all assured shorthold tenancies, regardless of when they were entered into.

Other rules were introduced on 1 October 2015 relating to the service of Section 21 Notices. These rules cover:

  • • Not serving a Section 21 Notice in the first 4 months of a tenancy
  • • Starting possession proceedings within 6 months of the date of service of the Section 21 Notice
  • • A ban on “retaliatory eviction”
  • • A requirement to provide tenants with a valid energy performance certificate, a current gas safety certificate and a copy of the publication “How to rent: the checklist for renting in England” published by the Ministry of Housing, Communities & Local Government.

Again, these rules originally applied only to tenancies granted on or after 1 October 2015. However, from 1 October 2018 they apply to all assured shorthold tenancies, even those granted before October 2015.

Landlords and agents should now ensure that all Section 21 Notices are drafted using the prescribed form of Notice and that the conditions mentioned above are complied with. For more information please refer to our Guidance on Section 8 and Section 21 Notices and our template Section 21 Notice for properties in England, available here on the Simply-Docs website.

Sign Here Please – Electronic Signatures and the Law

Whether your signature is an example of elegant calligraphy or of the scruffiest scribble, you have probably ‘signed here’ more times than you care to count. The 1677 Statute of Frauds required certain documents to be in writing and signed. This provision is still in force today.

But what of the documents being signed? Predications of the paperless office have become increasingly common over the past 100 years, particularly with the exponential growth of desktop and then mobile computing from the 1980s onwards. While a paperless business world is still, perhaps surprisingly, far from a reality, we are now closer than we have ever been before and think nothing of entire contracts being instantaneously transmitted from the other side of the world, ready for us to read on anything from a desktop computer to a smartphone.

Signing such a contract, though, often still catapults us back to 1677. Paper and biro might have replaced parchment and quill, but that all-important squiggle of ink on a physical page remains commonplace. Electronic signatures have been around for a while in various forms, but a question mark still hangs over them, particularly when it comes to important legal documents.

Clarification from the Law Commission

At last, clarification is at hand. Last month, the Law Commission confirmed that electronic signatures can be used to sign formal legal contracts under English law. Furthermore, the Law Commission has also confirmed that an electronic document is ‘in writing’ for legal purposes if it can be viewed on a screen in a legible form, and that deeds can both exist and be executed electronically.

Despite this, however, the Law Commission has said that there remains “a lack of clarity in the law” which is “discouraging businesses from executing documents electronically when it would be quicker and easier to do so”.

Law Commission Consultation on the Electronic Execution of Documents

With this in mind, the Law Commission has launched a formal consultation on electronic signatures and the electronic execution of documents. Specifically, the consultation seeks to:

“consider whether there are problems with the law around the electronic execution of documents and deeds (including deeds of trust) which are inhibiting the use of electronic documents by commercial parties and, if appropriate, consumers, particularly with regard to:

(a) Electronic signatures;
(b) Witnessing;
(c) Delivery…”

Following the consultation, the Law Commission will consider whether legislative or other changes are required to address these issues.

The consultation is open until 23 November 2018. Full details including a form to participate online are available on the Law Commission website.

Here at Simply-Docs, we are no strangers to electronic documents and if you’re here on our website, we suspect that neither are you. Do you distribute legal documents in electronic form? Do you use electronic signatures too, or do you prefer to execute documents using good old pen and paper? As always, we would love to hear from you in the comments below.

Call for Evidence on Energy Performance Certificates

The government has published a Call for Evidence on Energy Performance Certificates for Buildings. Landlords, tenants and agents of both domestic and non-domestic properties are all encouraged to respond.

The government foresees an expanding role for Energy Performance Certificates (EPCs) as part of its drive to reduce building energy use. The Clean Growth Strategy 2017 set out an aim for homes in the private rented sector to be upgraded to EPC band C by 2030, and an aspiration for as many homes as possible to be upgraded to band C by 2035. In March 2018 the Green Finance Taskforce recommended that the government set a target for all commercial properties to meet EPC band B by 2035.

With these aims in mind, the Call for Evidence aims to collect evidence on the effectiveness of EPCs, to gather information on the suitability of the current system of EPCs for both their current and emerging uses, and to obtain feedback on suggestions for improvement.

The consultation document is 53 pages long and sets out the government’s take on how the EPC system is currently working and how it might be improved. Respondents are asked to answer 26 questions (on pages 44-46). Responses must be given by 19 October 2018.

As a landlord, tenant or agent, how are you finding the current EPC system? Have the new Minimum Energy Efficiency Standards had an impact on your business? What do you think about the proposals for the minimum standards to be higher? Have your say in the Call for Evidence and share your thoughts with us below.